Linkage: CFPB’s Current Structure Is Best For Consumers

Below is today’s Originations linkfest. It’s focused on the Consumer Financial Protection Bureau (CFPB), which largely controls the fate of consumers, bankers, and the economy. But before I get to the links, here’s a quick background.

The massive Dodd Frank financial regulation overhaul, also called Finreg, created the CFPB to write and enforce hundreds of new rules consumer-facing financial institutions must follow. You may recall that Elizabeth Warren was selected to run the CFPB but Republicans campaigned so hard against her that she became politically risky for Obama, so he ended up appointing former Ohio Attorney General Richard Cordray to the post on January 4, 2012. It was a recess appointment that was deemed invalid this January, so while Cordray is in place now, the debate continues about whether he’ll stay.

Right now the CFPB is run by one leader, it’s funded by the Fed, and has oversight over most of the other bank regulators. Republicans are pushing for the CFPB to be run by a bipartisan group of people, funded only through Congressional voting, and they want to give other bank regulators veto power over CFPB rule making.

Those pushing for these changes should be careful what they wish for, because adding those inefficiencies will just cost the consumer more money.

So while it might make some lawmakers feel more relevant today, consumers will vote with their wallets tomorrow.

As a mortgage banker, naturally I was skeptical of the CFPB and Cordray at the outset. Then I learned what was going on at the CFPB behind the scenes as they were trying to implement the Qualified Mortgage/Ability-To-Repay rules required by Dodd Frank last year. Here’s what I said then:

The CFPB screened a portfolio recently closed loans made by one name-brand middle tier lender to near-perfect borrowers and property types (and made under the current, strictest of guidelines). The result: almost one-third of these loans weren’t considered Qualified Mortgages under proposed rules. That’s one-third of near-perfect credit quality consumers that lenders wouldn’t lend to for fear of loose regs that would lead to loose litigation.

Meanwhile, Washington is trying to broaden out the market so that too big to fail giants like Wells Fargo don’t control one-third of the mortgage market (which they do now). The middle tier players (because let’s face it, the small players simply can’t afford to comply in a Dodd Frank world) are key to bringing competition and consumer choice to the market, and limiting liability when they to make loans to the most qualified borrowers is a reasonable compromise.

That’s what the CFPB is charged with: preventing the pendulum from swinging from overly loose loan approval guidelines to overly tight regulations that choke off a housing recovery.

That CFPB analysis last year was done in collaboration with banks, and it caused the CFPB to pause on rolling out the Qualified Mortgage/Ability-To-Repay rules until they could revise their methodology. They did it to protect the consumer and to make sure their rules wouldn’t choke off the housing economy.

That’s why I changed my tune and think they’re doing as good a job as any regulator can do in a near-impossible balancing act. And I think the reason they’re so productive is because they’re not bogged down in bipartisan commissions, Congressional theatrics for funding, and they have one leader.

Anyone who’s ever witnessed a merger within their company knows that “co-head” structures always end in tears for the leaders, frustration/inefficiency for the workforce, and more cost for the firm.

It won’t be any different for consumers and the U.S. economy if those crusading to dismantle the CFPB get their way.

Meanwhile, rulemakings the CFPB is responsible for under Dodd Frank must continue under the timelines required by law. Next January is when most of the mortgage industry rules go into effect. So while lawmakers squabble about the fate of the CFPB, banks must comply with the timelines, and that’s what they’re all scrambling to do.

Banks are already spending hundreds of millions on lawyers and software consultants/developers to make sure they’re compliant, and this has already created more consumer cost. So if lawmakers pushing for a more convoluted CFPB leadership and funding structure get their way, it’ll just get worse for consumers.

Confounding. Anyone who’s got the counterpoint here, I’m all ears.

Anyway, this turned into more of a full post rather than just links. But here they are…
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